House of Commons Committee of Public Accounts

Foreign and Commonwealth Office: Managing Risk in the Overseas Territories

Seventeenth Report of Session 2007–08

Report, together with formal minutes, oral and written evidence

Ordered by The House of Commons to be printed 31 March 2008

HC 176 Published on 1 May 2008 by authority of the House of Commons : The Stationery Office Limited £0.00

The Committee of Public Accounts

The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148).

Current membership Mr MP (Conservative, Gainsborough) (Chairman) Mr Richard Bacon MP (Conservative, South Norfolk) Angela Browning MP (Conservative, Tiverton and Honiton) Mr Paul Burstow MP (Liberal Democrat, Sutton and Cheam) Rt Hon David Curry MP (Conservative, Skipton and Ripon) Mr Ian Davidson MP (Labour, Glasgow South West) Mr Philip Dunne MP (Conservative, Ludlow) MP (Labour, Wallasey) Nigel Griffiths MP (Labour, Edinburgh South) Rt Hon Keith Hill MP (Labour, Streatham) Mr Austin Mitchell MP (Labour, Great Grimsby) Dr John Pugh MP (Liberal Democrat, Southport) Geraldine Smith MP (Labour, Morecombe and Lunesdale) Rt Hon Don Touhig MP (Labour, Islwyn) Rt Hon Alan Williams MP (Labour, Swansea West) Phil Wilson MP (Labour, Sedgefield)

The following were also Members of the Committee during the period of the enquiry:

Annette Brooke MP (Liberal Democrat, Mid Dorset and Poole North) and Mr John Healey MP (Labour, Wentworth).

Powers Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume.

Committee staff The current staff of the Committee is Mark Etherton (Clerk), Emma Sawyer (Committee Assistant), Pam Morris (Committee Assistant) and Alex Paterson (Media Officer).

Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected].

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Contents

Report Page

Summary 3

Conclusions and Recommendations 5

1 The Department’s oversight of offshore financial services in the Territories 7

2 Attaining the right balance between UK and Territory funding and responsibilities 11

3 Governance and managing Territories’ external relations 13

Formal Minutes 15

Witnesses 16

List of written evidence 16

List of Reports from the Committee of Public Accounts 2007–08 17

3

Summary

The retains responsibility for 14 Overseas Territories, 11 of which are permanently populated and which choose to remain under British sovereignty rather than to become independent states. The Territories are a diverse group, including , home to 65,000 people and a major financial centre, and St. Helena, one of the most isolated populated islands in the world and reliant on UK aid.

While the Territories are a UK-wide responsibility, the Foreign and Commonwealth Office (“the Department”) is the lead Department for coordinating UK Government policy for the Territories. The Department for International Development (DFID) coordinates development assistance, focusing on the three Territories of , St. Helena and Pitcairn.

Assessing and managing the diverse range of risks facing the Territories is challenging. The Department aims to strike a balance between maximising the autonomy given to Territories’ democratically elected governments, and minimising risks to the UK. The UK has dealt with a wide variety of risks and liabilities in the past, including pension liabilities of an estimated £100 million in and emergency aid of over £250 million to Montserrat after a volcanic eruption on the island.

The Department is attempting to increase capacity for oversight of Territories’ financial services industries. However, regulatory standards in most Territories are not yet up to those in Dependencies.1 Limited capacity also reduces the ability of Territories to investigate and prosecute money laundering. The Department has written to UK agencies, such as the Financial Services Authority, the and the Serious Organised Crime Agency, to emphasise the need for their involvement.

The Governor retains responsibility for managing risks such as crime and disasters, yet is dependent on funding being provided from Territory governments. In order to preserve relationships with local governments, Governors tend to rely on their influencing abilities and are reluctant to use more coercive measures to require funding.

Territories have seen improvements in disaster management, but this needs to accelerate as rising sea levels and global warming add to the existing risks from hurricanes and volcanoes. The Department’s programme funds aimed at increasing Territory capacity to meet risks and encouraging sustainable development have been too thinly spread to be effective.

Standards of governance and financial reporting in the Territories are variable and can fall below standards acceptable in UK Local Government. Lax financial management can evade Departmental controls to protect the UK from risk, although there is stronger fiscal oversight of Territories receiving Development aid. The Department also represents the Territories’ external interests. It is continuing diplomatic contacts with Argentina over a lack of air access through Argentinean airspace to the Falklands Islands, and over rights to

1 , and the

4

fishing licences, an important income generator in the South Atlantic. The Department also maintains that legal costs it has incurred in contesting the right of the Chagos Islanders to return to their homeland of Diego Garcia in the British Indian Ocean Territory are justified.

On the basis of a report by the Comptroller and Auditor General, the Committee took evidence from the Department and the Department for International Development on the oversight of offshore financial services in the Territories; on the balance between UK and Territory funding and responsibilities; and on governance and management of the Territories external relations.2

2 C&AG’s Report, Foreign and Commonwealth Office: Managing Risk in the Overseas Territories, HC (Session 2007-08) 4

5

Conclusions and Recommendations

1. The Department has responsibility for managing risks such as crime and disasters, but does not have direct control over funding, which is provided by Territory governments. The Department should go beyond its usual reliance on persuasion, and be more prepared to require money from Territory governments in areas where the UK has constitutional responsibility. It should also publicise where standards are not being met, better to inform Territory citizens.

2. Overall regulatory standards in most Territories, particularly those with smaller financial centres, are poor compared to standards achieved in the . The Department and other relevant UK agencies, such as the Financial Services Authority, the Treasury and the Serious Organised Crime Agency need to deploy their expertise and capacity jointly to manage the risks better, particularly in the smaller offshore centres.

3. Territories’ financial services lack the investigative capacity to scrutinise suspected money laundering activity fully and Governors have not used their reserve powers to rectify this. In such a sensitive aspect of the global financial system it is complacent to allow territories for which the UK is responsible entirely to manage the risk themselves. UK technical assistance and advice should be matched by local efforts and funding to drive forward regulatory improvements. The Department and the UK agencies should bring in more external investigators or prosecutors from the UK to bolster capacity until the Territories can be self-sufficient in this area.

4. The Department has no dedicated training programme for Governors, despite the special characteristics of the role compared to mainstream diplomatic activities. The Department should provide all Governors and other key staff with training in the key risk areas relevant to their post, including financial services. Training needs should be assessed throughout each Governor’s posting.

5. The Department acknowledges that policing standards in the Territories fall short of its expectations, yet has used external inspection by HM Inspectorate of Constabulary on only three occasions. Territory citizens should not have to accept less efficient use of police resources, nor less professional oversight than citizens in the UK. The Department should lay down the policing standards expected of the Territories, and test whether they are met on a more consistent basis.

6. There have been improvements in standards of disaster management, but ten years after this Committee’s last report on the subject not all Territories have comprehensive disaster management strategies. The increased risks posed by climate change and rising sea levels make disaster planning especially important for low-lying Caribbean Territories. The Department, together with the Department for International Development and Territory governments, should draw up disaster management strategies where they do not exist, setting out the responsibilities of each party and the minimum requirements for the frequency of disaster plan tests.

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7. The Department’s Overseas Territories Programme Fund has been too thinly spread over too many projects to be effective in increasing capacity or promoting sustainable development in the Territories. The Department proposes to move to fewer, larger projects in 2008/09, which should have the potential to generate a greater impact. The Department should develop benefits realisation for these projects to verify that they have lasting effect.

8. The UK continues to subsidise wealthier Territories such as Bermuda and the , in the latter case providing over £600,000 of free services each year to regulate civil aviation on their behalf. Unless there are compelling reasons to the contrary, the UK should charge for services such as aviation regulation where Territories are able to pay from their own resources.

9. Public accountability in the Territories is difficult to sustain in small communities, and not all Territories have functioning Public Accounts Committees. In dialogue with individual Territory governments, the Department should also explore how Territories can better use the expertise available in the UK to support the development of their own capability, and whether more use could be made of ex-officio members in individual Public Accounts Committees.

10. Civilian use of regular military flights between the UK and the Falklands has become vital to the social and economic development of the Islands since the closure of Argentine airspace to civilian services. The Department, the Ministry of Defence and the Falklands Government have been successful in jointly developing civilian use of these capabilities. As the new operator contract is taken forward, costs, risks and rewards should be apportioned between the partners so that reliable public access to the Islands is provided, and the requirements of all parties (such as a set number of premium seats) are met.

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1 The Department’s oversight of offshore financial services in the Territories

1. Seven of the UK’s Overseas Territories have offshore financial centres, of varying size and significance to their economies.3 Of these, Bermuda, the and the British Virgin Islands have a high importance in the global financial system. The UK’s reputation in the financial services industry is linked to how well its Territories perform against international standards. The Department and its Governors have a key role in protecting the UK from serious reputational risks and possible financial liabilities by ensuring that global standards for banking, insurance, securities and defences against money laundering, to which the UK has signed up on the Territories behalf, are being met. The Department does not have an established financial services training programme for Governors, although it does provide tailored training to new Governors taking up Post, depending on experience and the issues relevant to that Territory.

2. Whilst the UK faces the ultimate risk should any financial malpractice occur, it is the responsibility of Territory governments to develop the necessary regulatory arrangements. The Department believes that, apart from UK encouragement, market forces and the need to get a positive rating from the International Monetary Fund are the most effective incentives for Territories to improve their standards.4 Despite this, regulatory standards have not yet reached those attained by the Crown Dependencies across the areas of banking, money laundering, insurance and securities. In Bermuda and , anti- money laundering measures were 22% and 25% non-compliant respectively, compared to zero non-compliance in the Crown Dependencies.5 As Figure 1 shows, there is considerable variation between and within the Territories.

3. The Comptroller and Auditor General’s report found Territories to be lacking in regulatory capacity, especially those with smaller offshore centres, such as the , Montserrat and Anguilla.6 As a result, they are increasingly struggling to meet rising international standards.7 For these three Territories, the UK retains direct constitutional responsibility for the regulation of financial services. The Department accepts that standards in these Territories need to improve, and is taking steps to drive up capacity: it employs a financial services adviser, based in the Caribbean, and is providing assistance in drafting legislation to allow the Territories to retain and reinvest the confiscated proceeds of crime.8 But it is improbable that the deployment of a single Departmental specialist is sufficient to address the scale of the risk.9 The Department

3 Bermuda, the Cayman Islands, the British Virgin Islands, Gibraltar, the Turks and Caicos Islands, Anguilla and Montserrat 4 Qq 36, 110 5 Q 104; Figure 1 6 Q 9; C&AG’s Report, para 1.32 7 Q 63 8 Qq 8, 73–74

9 Q 40

8

acknowledged that the Comptroller and Auditor General’s report was helpful in giving it added impetus to intensify its efforts in helping the Territories improve standards.

Figure 1: International Monetary Fund assessments regulation of offshore financial services in Overseas Territories 10

Test assessment results, 2003 2005

2001 2003 2004 showing the extent of (3)

compliance with global 2005 standards Islands Islands British Virgin British Virgin Anguilla Anguilla Gibraltar Bermuda The three Crown Cayman Islands Montserrat Dependencies 2003

% % % % % % % Banking Compliant 73 19 12 36 62 63 63 Largely compliant 27 33 19 14 38 37 34 Materially non- 33 54 39 - - 2 compliant Non-compliant - 15 15 11 - - - Money Compliant 41 38 53 59 65 81 Laundering Largely compliant 34 28 38 19 29 19 Materially non- 22 31 6 22 6 - compliant Non-compliant 3 3 3 - - - Insurance Observed 76 76 38 47 70 Largely observed 18 6 13 18 26 Materially non- 6 18 44 35 2 observed Non-observed - - 6 - 2 Securities Implemented 86 25 40 46 81 Broadly Implemented 14 31 37 19 8 Partly Implemented - 44 23 31 11 Not Implemented - - - 4 - Source: National Audit Office analysis of International Monetary Fund assessments

Notes (1) The table summarises compliance in six of the seven Offshore Financial Centres. Turks and Caicos Islands were excluded because the International Monetary Fund has not published its detailed breakdown of results. Percentages are rounded and may not always add to 100%. (2) The smaller centres were not assessed for insurance and securities business. (3) The Crown dependencies are Jersey, Guernsey and the Isle of Man. 4. Regulators in Bermuda, the Cayman Islands and the British Virgin Islands have achieved major improvements in capacity since 2000, enabled by their ability to levy fees on their growing financial sectors.11 In the centres with a smaller regulatory capacity, the Governor retains more direct powers to intervene. In Montserrat, for example, the Governor has the authority to restrict the development of the financial sector, although this power has not been used for over ten years. 12

10 The table shows the first round of IMF assessments for each jurisdiction. At the time of this report, the first second round report, for Gibraltar, had been published, with highly favourable results. Assessments in Turks and Caicos Islands, Anguilla and the British Virgin Islands had been deferred at local request, and the reports on Bermuda and the Cayman Islands had not yet been published. 11 C&AG’s Report, para 1.32 12 Qq 43, 68–70

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Figure 2: Levels of monitoring and investigating suspicious financial activity in the Territories are variable

Territory Number of Estimated No. Reports Financial Number of suspicious employed in per Intelligence and successful activity Financial hundred Investigative local reports (2005) Services employed capability (1) prosecutions (2)

Bermuda 380 (2006) 4000 10 11 0

Cayman Is. 244 5400 5 21 2

British Virgin Is 101 1600 6 5.5 0

Gibraltar 108 1500 7 8 0 (1 pending)

Turks & Caicos 17 700 2.4 5 0 (3 pending) Islands

Anguilla 2 200 1 1 0

Montserrat 1 150 0.7 1 0

External benchmarks:

Jersey 1162 11800 10 22 (2003) (3) Isle of Man 1652 7010 24 22

Source: Summarisation by National Audit Office, and latest IMF assessment reports

Notes: (1) Full time equivalents. Professional staff. (2) In some cases investigations are ongoing and charges have been laid (3) Included at the time seven staff seconded from the UK 5. A lack of local capacity has also impacted on Territories’ ability to investigate and prosecute suspected money laundering activities. Governors have sought a balance between pushing for more local capacity on one hand and respecting local autonomy on the other. As Figure 2 shows, the number of suspicious transaction reports across the Territories appears low: Anguilla and Montserrat produced only three such reports between them. The Department agrees that there is a serious risk of money laundering in the Territories, particularly in the smaller Territories which lack the critical mass of regulatory and investigative expertise to follow up these reports. It has written to other UK departments and agencies, such as the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, to emphasise the need for their involvement.13

6. The Department was unable to state clearly the comparative advantage which the Overseas Territories used to attract offshore financial business, but cited their tourist infrastructures and low taxation as areas where the Territories are in a more advantageous position.14 The Department stressed the self-governing nature of the Territories and has therefore accepted their evolution as tax havens as a way to diversify their economies further. However, it has continued to exert pressure on Territory Governments to develop regulatory standards which are the best in the region. The Department for International

13 Qq 9, 37, 78, 147–149 14 Qq 83–84

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Development (DFID) confirmed that it was not planning to assist St. Helena in developing a financial centre, but was concentrating on developing it as a niche tourist destination.15

15 Q 82

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2 Attaining the right balance between UK and Territory funding and responsibilities

7. Governors’ constitutional responsibility for internal security requires them to exercise oversight of Territory prison and police services and prepare them for dealing with natural and man-made disasters. Governors depend on funding being provided from the Territory governments in order to discharge these vital functions. Managing this balance has proved a challenge in the past. For example the prison in Anguilla, although built with UK funding, does not meet minimum standards of security and segregation, and there have been three breakouts, and other serious incidents, in the last two years.16

8. The Department admitted that there was no easy solution; while it felt that it is right for law and order to remain a Governor responsibility, it ought not to fall to the UK to meet the costs of law enforcement, prison and disaster management agencies in the Territories, especially those which are richer per head than the UK.17 The onus is on Governors to use their diplomatic influence and their position as head of Territories’ Executive Councils to encourage Territory governments to allocate necessary funds to law and order and disaster management. If Territory governments fail to make funds available, Governors have reserve powers to require funding. The Department cautioned that the use of these powers must be balanced against the need to respect democratically elected local governments.18

9. The UK also has a responsibility to ensure that Territory police forces are fit for purpose. The Department funds a law and order adviser to Governors and maintains a database of retired British police officers to provide advice and expertise to the Territories. It has only used external inspection by the UK HM Inspectorate of Constabulary on three occasions, though as external inspection is perceived as expensive, Territory governments are often unwilling to provide the necessary funding.19 The Department is not yet happy with the overall level of policing expertise but was reluctant to use its reserve powers to force Territories to fund inspections for fear it might jeopardise good working relations between the Territory governments and the UK.20

10. The Overseas Territories are at risk of natural and man-made disasters. The extent to which the UK could be called on to provide funding for disaster response depends on the wealth of the Territory and its ability to fund any response and recovery for itself. Since the 1995 volcanic eruption in Montserrat, the UK has provided over £250 million in emergency aid, whereas the Cayman Islands met the US$2.5 billion cost of Hurricane Ivan without recourse to UK financial assistance.21 The standard of disaster management in the Territories is improving, but Territories are at very different stages, with some, such as the Cayman Islands and the British Virgin Islands, having more advanced systems. All

16 C&AG’s Report, Appendix 3.1, p 43 17 Q 12 18 Q 147 19 Qq 138–143 20 Qq 142–147 21 Q 153; C&AG’s Report, Figure 11, p 27; Appendix 3.4, p 47

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Territories now have elements of an overall disaster management strategy; however climate change and global warming has exacerbated the risk in low-lying Territories.22 DFID funds a disaster management adviser to support disaster management agencies in the Caribbean. It told us that Territories were exercising plans more regularly and are progressively incorporating disaster risk management into their own planning, though it conceded that the rate of improvement needs to accelerate to respond fully to the increased risk.23

11. A lack of capacity in-Territory is also a challenge when responding to law and order and disaster risks. Increased cooperation and sharing of resources between Territories has been used to address this, most notably in the recently established legal drafting centre in Anguilla, which will provide other Caribbean Territories with access to legal drafting expertise.24 The Department maintains an Overseas Territories Programme Fund of approximately £5 million, which aims to promote sustainable development and build capacity in the Territories, across all risk areas. So far, the funds have been spread across too many small projects to be fully effective.25 The high number of projects has also made it difficult for Governors’ offices to manage and to monitor them. From 2007/08, the Department intends to move to fewer, larger, and more sustainable projects which have the potential to generate greater impact.26

12. Wealthier Territories such as Bermuda and the British Virgin Islands still receive some UK resources, despite their GDP per head outstripping that of the UK. The British Virgin Islands receives £600,000 of free services each year to regulate its civil aviation. Aviation regulation has been successful across the Territories due to ongoing support from the UK and Air Safety Support International, although the Department agrees that, where the Territories can afford it, they should fund themselves.27

22 Qq 32, 33 23 Q 34 24 Q 153 25 Q 112 26 Q 113 27 Q 152

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3 Governance and managing Territories’ external relations

13. The Territories share the challenge of running a system of government in a small , where the legislature is made up of a few individuals, and direct personal or family relationships often exist between officials and citizens. There are added difficulties in promoting good governance in such communities, which can result in a weakened ability for the UK to identify potential risks.28 Not all Territories have a Committee of Public Accounts, for example, and some that do exist only meet in private. The rare instances of using ex-officio members in Committees to provide expertise, and the NAO’s recommendation that Territories pool their expertise on public accounts, are examples of how more can be done to improve public scrutiny.29

14. The former Chief Auditor of the Turks and Caicos Islands approached the UK’s Comptroller and Auditor General about the lack of qualified audit staff and visibility of audit reports, rather than addressing these issues through local channels.30 The reports of the Auditor General of Bermuda also noted that, while the accounts of Bermuda’s central government were up to date, other public bodies were five or six years in arrears. And there were delays to the public pension and insurance fund which controls assets of approximately $1billion.31 These standards would not be acceptable in UK Local Authorities. The Department is taking some action, for example, by organising a link between the National School of Government and the Turks and Caicos Islands public service, but it also emphasised that Territories should also be putting in place measures themselves.32

15. DFID has a good system for monitoring expenditure by those Territories in receipt of budgetary aid. This includes a financial risk assessment every two years, an annual statement of progress, and regular visits by DFID staff.33 Both DFID and the Department also use an adapted version of the Public Expenditure and Financial Accountancy framework, which was developed by the World . But they do not apply the framework so that they can benchmark Territories against standards elsewhere.34 The Department operates further control through its borrowing guidelines. These aim to protect the UK from Territories taking on too high a debt, which they may be unable to service. Borrowing controls can be evaded, however, by late accounts or subsequent adjustments, causing the UK to make borrowing decisions which might not have been agreed to if accurate accounts had been available.35

28 C&AG’s Report, para 2.16, p 30 29 Q11; C&AG’s Report, Recommendation 9 30 Q 9 31 Q 88; C&AG’s Report, para 2.17, p 31 32 Qq 90, 93 33 Qq 93–95 34 C&AG’s Report, endnote 7, p 66 35 Qq 97–98; C&AG’s Report, Figures 4, 14

14

16. Since 2000, the Department has spent in excess of £2.1 million on legal cases contesting the right of the Chagos Islanders to return to their homeland in the British Indian Ocean Territories.36 The Department is now appealing to the on three issues: firstly that any lasting settlement of the islands would be precarious and expensive for the UK; secondly that the resettlement of the Islands would pose a security risk to the United States defence base at Diego Garcia; and thirdly whether Orders in Council made by the UK for the administration of the Overseas Territories can be challenged in the UK courts.37 The Department feels that the costs incurred to pursue this case are justified, and noted that the Chagos Islanders had already accepted compensation for their displacement.38

17. The UK maintains responsibility for the external defence of its Territories and their international relations. Since 2003, Argentina has withheld permission for UK charter flights to the to pass through its air space. This restriction makes the direct military air service provided by the Ministry of Defence via vital for the development of the Falklands. The Falklands Government has raised concerns about the lack of a regular air service and the need for more certain booking arrangements for a business class service.39 A new contract between the Ministry of Defence and the operator, Omniair, began in October 2007. This service guarantees up to 29 seats southbound and 39 seats northbound for the Falklands Islands Government, and 20 commercial seats each way between the UK and Ascension Island. In addition there will be up to 10 premium economy seats available on each flight. The Department is liaising with the Ministry of Defence and the Governments of the Falkland Islands and Ascension Island on negotiations for the future service, including seat costs, advance payment and booking mechanisms.40 The Department plans to continue its diplomatic activities to address the air access issue with the new Argentinian President and Government.41

18. The development and diversification of income streams is important to the development of the Territories. This is demonstrated by the positive impact achieved by the annual £26 million fishing licence income generated for the Falkland Islands government.42 After the 1982 conflict, the British Government and the Falklands Islands Government were concerned over the threat to fishing stocks in the waters around the Falklands. After unsuccessful attempts by the UK Government to promote a multilateral fisheries management regime in the South West Atlantic, the UK decided that it had no option but to take unilateral action and announced the introduction of the Falkland Islands Interim Conservation and Management Zone. There is currently no treaty governing fishing on the high seas in the South West Atlantic. The Department is in ongoing negotiations with the World Wildlife Fund, the European Commission and relevant coastal states about a possible resolution.43

36 Q 17 37 Ev 16 38 Qq 17–29, 123–132 39 C&AG’s Report, Appendix 3.5, p 50 40 Ev 16 41 Q 115 42 Q 114 43 Ev 16

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Formal Minutes

Monday 31 March 2008

Members present:

Mr Edward Leigh, in the Chair

Mr Richard Bacon Mr Alan Williams Mr Keith Hill Phil Wilson Mr Don Touhig

Draft Report (Foreign and Commonwealth Office: Managing Risk in the Overseas Territories), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 18 read and agreed to.

Conclusions and recommendations read and agreed to.

Summary read and agreed to.

Resolved, That the Report be the Seventeenth Report of the Committee to the House.

Ordered, That the Chairman make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

[Adjourned until Wednesday 2 April 2008 at 3.30 pm.

16

Witnesses

Monday 10 December 2007 Page

Sir Peter Ricketts KCMG, , Foreign and Commonwealth Office, and Dr Minouche Shafik, Director General, Country Programmes, Department for International Development Ev 1

List of written evidence

1 Letter from Mr David Snoxell to the Comptroller and Auditor General Ev 15 2 Foreign and Commonwealth Office Ev 16

17

List of Reports from the Committee of Public Accounts 2007–08

First Report Department for International Development: Tackling rural poverty in developing countries HC 172 (Cm 7323) Second Report Department of Health: Prescribing costs in primary care HC 173 (Cm 7323) Third Report Building for the future: Sustainable construction and refurbishment on the government estate HC 174 (Cm 7323) Fourth Report Environment Agency: Building and maintaining river and coastal flood defences in HC 175 (Cm 7323) Fifth Report Evasion of Vehicle Duty HC 227 (Cm 7323) Sixth Report Department of Health: Improving Services and Support for People with Dementia HC 228 (Cm 7323) Seventh Report Excess Votes 2006–07 HC 299 Eighth Report Tax Credits and PAYE HC 300 Ninth Report Helping people from workless households into work HC 301 Tenth Report Staying the course: the retention of students on higher education courses HC 322 Eleventh Report The compensation scheme for former Icelandic water trawlermen HC 71 Twelfth Report Coal Health Compensation Schemes HC 305 Thirteenth Report Sustainable employment: supporting people to stay in work and advance HC 131 Fourteenth Report The budget for the London 2012 Olympic and Paralympic Games HC 85 Fifteenth Report The Pensions Regulator: Progress in establishing its new regulatory arrangements HC 122 Sixteenth Report Government on the Internet: Progress in delivering information and services online HC 143 Seventeenth Report Foreign and Commonwealth Office: Managing Risk in the Overseas Territories HC 176

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Committee of Public Accounts: Evidence Ev 1 Oral evidence

Taken before the Committee of Public Accounts

on Monday 10 December 2007

Members present:

Mr Edward Leigh, Chairman

Mr Richard Bacon Mr Austin Mitchell Mr Ian Davidson Dr John Pugh Mr Philip Dunne

Sir KCB, Comptroller and Auditor General, Mr Tim Burr, Deputy Comptroller and Auditor General, and Mr Tim Banfield, Director, National Audit OYce, were in attendance. Mr Marius Gallaher, Alternate Treasury OYcer of Accounts, HM Treasury, was in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

FCO: MANAGING RISK IN THE OVERSEAS TERRITORIES (HC 4)

Witnesses: Sir Peter Ricketts KCMG, Permanent Secretary, Foreign and Commonwealth OYce, and Dr Minouche Shafik, Director General, Country Programmes, Department for International Development, gave evidence.

Q1 Chairman: Good afternoon. Welcome to the Sir Peter Ricketts: I said it will be our intention to Public Accounts Committee where today we are engage this new President and her team to show that looking into the National Audit OYce Report, we have mutual interests in working together on the Managing risk in the Overseas Territories. We are Falkland Islands. joined by Sir Peter Ricketts, Permanent Secretary, Foreign and Commonwealth OYce. Would you like Q5 Chairman: Do you think that will meet with a to introduce your colleagues? positive response, judging by what has happened, Sir Peter Ricketts: I have Minouche Shafik from the say, in the last 18 months? Department for International Development with me Sir Peter Ricketts: That is what we will be working today at the table and a number of colleagues from to achieve. Now that the lady is in power I think we our Overseas Territories Directorate, including the have every interest in engaging early on with her to Head of it, Leigh Turner, who doubles in a number show that we have mutual interests here. of roles, including Commissioner for the British Antarctic Territory. Q6 Chairman: Are there any risks of inconveniences being re-ignited to any extent in Gibraltar at the moment? Q2 Chairman: Have we had the pleasure of your Sir Peter Ricketts: No, I think things are positive in company before at the PAC? terms of managing the risks in Gibraltar. As the Sir Peter Ricketts: No, sir. Report sets out, we have made progress in mitigating a number of the risks, for example, on the Gibraltar Q3 Chairman: I am sorry about that. I hope it is an pensions issue, and I think after the Cordoba enjoyable experience for you. I see that the Agreement last year things look more positive now Argentines have a new lady President and there are in Gibraltar. also reports that the economy may now be overheating. What is the risk, do you think, of Q7 Chairman: In terms of Montserrat, physical risks Argentina increasing pressure on the Falkland there, what do you have in place to deal with that? Islands in the foreseeable future? Sir Peter Ricketts: I visited Montserrat earlier this Sir Peter Ricketts: We do not believe that there will year in fact because I was worried about the risk be pressure of a kind that is going to create management there. We have put an awful lot of diYculties in the islands. This is something we shall scientific expertise on to the island to monitor the have to talk to the new Argentine President and her volcano and we have a Scientific Committee that government about but there is a lot of scope and meets twice a year to bring together the best volcano mutual interest in cooperation between us and watchers in the world to advise the Governor on Argentina on the Falklands. what is likely to happen with the volcano. I think it is probably the most observed volcano in the world. There are some pretty careful restrictions in place on Q4 Chairman: Can you speak up, please? I did not the island so that, if there were another eruption, the quite hear what you said. The acoustics are not very lava flow would not injure life. Some of those good in this room. restrictions are controversial on the island because Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

Ev 2 Committee of Public Accounts: Evidence

Foreign and Commonwealth Office & Department for International Development the volcano has not actually erupted for the last few territories is that they often have very small numbers years but we are keeping it under very vigilant of people involved in the legislature. People shift scrutiny. from opposition to power and may be investigating themselves almost. Tell us exactly what is happening Q8 Chairman: Can we look at risks from money- in the Turks and Caicos Islands and reassurance that laundering? If you look at paragraph 1.35 on page 23 you have got a grip there, please. of the Report under the heading “Limited capacity Sir Peter Ricketts: First of all, the Governor— to investigate and prosecute financial crime is a risk in most Territories”, if you look at the figure there, you can see, for instance, Bermuda, number of suspicious activity reports, 313; estimated number Q11 Chairman: For instance, our Clerk has just employed in financial services, 4,000; reports per 100 shown me that on page 32 we see that not all employed, only eight. If you compare that with territories have a committee of public accounts or another example, say, the Isle of Man, you will see similar scrutiny body. Some that do only meet in reports per 100 employed, 24. It seems that most private. I am sure many Permanent Secretaries suspicious activity reports are not being properly would like us to meet in private or not exist at all, but investigated, so how can we know whether these we do. territories constitute a significant money- Sir Peter Ricketts: Mr Chairman, I am delighted to laundering risk? respond to that. On the question of committees of Sir Peter Ricketts: I share your worry about the risks public accounts, there is a problem in some of these in the financial services area, the risk of money- tiny places with tiny legislatures in constituting and laundering on the territories, particularly the smaller having a properly functioning committee of public territories, who, as the Report describes, do not yet accounts, and indeed producing properly audited have the critical mass of regulatory expertise to accounts. There is some good practice, even from the follow up on these reports. What we are trying to do smaller territories. I know that Montserrat has is drive up capacity in the smaller territories to be introduced a practice of having an ex oYcio member able to employ more regulators. We have a financial of the public accounts committee who can bring in services adviser based in the region whose job it is to from the outside some expertise. I think that is go round territory by territory, trying to drive up something we could do more of around the standards. We are supporting the introduction of Caribbean overseas territories. We had all the legislation in some of the smaller territories that will elected Chief Ministers here for a conference last give them rights to proceeds of crime and to civil week and I took the opportunity of going through recovery so that they have more revenue with which the Report with them, including this point, and to employ more regulators so that they can follow up recommending that they think about perhaps a pool more of the suspicious activity reports. I share your of expertise on public accounts that they could draw concern, Chairman, at the risks here. That is why we on so that they do not have to have it all resident on have it very much on our— the islands all the time but can draw on it. You referred to the Turks and Caicos Islands. I too am Q9 Chairman: We are responsible for this, are we concerned that there is still not enough capacity to not, obviously, if something goes badly wrong? For deal with the regulatory issues that they face. The instance, in paragraph 1.32 on page 21 we read of Governor is very conscious of that. The Governor limited regulatory capacity. This is particularly himself watches this very closely. We make sure that marked in the Turks and Caicos Islands, Montserrat our financial services, and other, advisers visit and Anguilla. Apparently, the Chief Auditor of the regularly. We have organised a link between the Turks and Caicos Islands herself had to come to our public service in the Turks and Caicos Islands and own Comptroller and Auditor General to express the National School of Government here to her concern about what was going on in the Turks introduce public service reform and to make and Caicos Islands. Does this worry you, the lack of available to them the best expertise we have in the regulatory activity and capacity? UK to try and improve the capacity on the islands Sir Peter Ricketts: Yes, it worries me and we are to manage these diYcult issues. I think provision of doing everything we can to improve the capacity, as advice and technical assistance is probably the best I say, by increasing the revenues that these smaller contribution that we can make, Mr Chairman. territories have by giving them advice from the UK. In the light of this Report, Mr Chairman, I have written again to the other Departments concerned, the Treasury, the Serious Organised Crime Agency, Q12 Chairman: Is there a problem that in these and others to reinforce the need for all of us in territories the Governor is responsible for law and to be doing everything we can to make order but the local government pays for it and there sure that we are giving these smaller territories the might be a tension there? For instance, we read on technical assistance they need to keep up to date with page 43 about Anguilla’s prison. It was built in 1996 developments and to pursue any suspicious activity. with UK funding. “However, it currently fails to meet minimum standards of security and Q10 Chairman: Can you say anything more segregation. A serious assault led to the death of a specifically about the Turks and Caicos Islands? It remand prisoner in 2006. 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Foreign and Commonwealth Office & Department for International Development contraband goods to enter the site. There have been David Snoxell,1 who was High Commissioner in three breakouts in the last two years.” How do you Mauritius until November 2004. He questions the resolve this tension? What more can Governors do expenditure on the lawsuits to keep the islanders when they feel that law and order is threatened by from going home. Could you tell us how much these under-resource and by local government? have cost over the years? Sir Peter Ricketts: I do not think there is an easy Sir Peter Ricketts: I believe we have incurred legal solution because I think it has to be right, Mr costs of several hundred thousand pounds so far, in Chairman, that the Governor has responsibility in the order, I think, of £300,000, from memory. the end for law and order in his or her territory. On the other hand, I do not think any of us would want HMG to be financially liable for all the costs of law Q17 Mr Mitchell: The legal costs that have to be paid enforcement and prison improvement in the islands. by HMG were admitted by the FCO to be in excess They do have their own revenues and, in the end, it of £2,171,000. That is in an answer to a PQ. That is comes down to a question of priorities as to how they substantially higher than that. apply those revenues. The Governor in the first place Sir Peter Ricketts: That, I think, relates to all the has the responsibility, I think, to encourage and legal costs paid in the successive cases since the year cajole the local governments to spend the money 2000, the costs of the Chagos Islanders themselves. necessary on police, on prisons, to make sure that The figure I have here is £1.8 million. That is the total there is a properly functioning criminal justice cost of all legal proceedings. My figure, I think, was system. I do not think the answer would be to take the cost of our appeal to the House of Lords on this back— point of law.

Q13 Chairman: This has always been a problem, has Q18 Mr Mitchell: Mr Snoxell estimates the total cost it not, the fact that the government is responsible for to be in excess of £3 million, not counting the cost of law and order but the local parliament has to pay for going to the House of Lords, as we now are. Is it it? This is what caused the American Revolution in justified to spend this amount of money? the first place, was it not? In a tiny scale, you are Sir Peter Ricketts: We believe it is. trying to resolve the same problems, are you not? Sir Peter Ricketts: Yes, you are. As I say, I do not think the answer is to repatriate the financial Q19 Mr Mitchell: Why? responsibility. I think the answer is to make sure that Sir Peter Ricketts: For two reasons. First of all, we have proper advice. We have a prison reform co- there is a very important point of law here on ordinator resident in Miami who is there to help whether the Government can make laws for the Governors and governments on what needs to be overseas territories by Order in Council or not and, done. At the end of the day it is a question of if not, then there are serious implications for the prioritisation and I think it is up to the Governor governance of the overseas territories. and his Executive Council, his Ministers, to decide on the prioritisation that gives enough resources to law and order. Q20 Mr Mitchell: Is it not a daft legal position that Orders in Council cannot be subject to judicial review? Surely they must be subject to judicial Q14 Chairman: Can I ask one of you—it may be review. DfID can comment here—on figure 11, right at the Sir Peter Ricketts: The Government’s position is bottom, the harbour saga. What that, if these types of Orders in Council are subject to happened there? What went wrong? judicial review under UK public law principles, then Dr Shafik: That issue dates from about 15 years ago, there is potential for enormous confusion because when we were asked to look at the harbour and there they are laws for the overseas territories and they will were modifications made to the original design in bind the overseas territories in their own territories, response to the local fishing community. They their own parliaments, but not in the UK, but they finished it in time for the winter storms. As a result will bind UK Ministers in the UK. This risks of that the conditions in the harbour deteriorated undermining the way in which we have governed the and they were damaged. I am pleased to inform you overseas territories using Orders in Council to adopt though that we have now got agreement from the their constitutions and then for them to make laws. Royal Engineers, who will be going to repair that There is a second point as well, which is our defence harbour in time for the next winter in March. obligations, since the United States have made clear that resettlement of the islands by the Chagos Islanders would pose security risks to the operation Q15 Chairman: How many of these places have you been to, Sir Peter, as a matter of interest? of the base at Diego Garcia. Sir Peter Ricketts: I personally in this job have been to Montserrat so far. Q21 Mr Mitchell: That is the real reason, is it not? We do not want to inconvenience the Americans. Q16 Mr Mitchell: Can I just ask you about the Chagos Islands? We have a letter from 1 Ev 16 Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

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Sir Peter Ricketts: No. There are two reasons. One Sir Peter Ricketts: I can of course write to you on is that there is a very important point of law here that point. It is being pursued on the Foreign about the governance of the overseas territories. The Secretary’s authority at the present time. other is our obligations as an ally of the US for the 2 defence interests of the base. Q28 Mr Mitchell: Whatever the estimates of the costs, if they are over £3 million, as suggested here, Q22 Mr Mitchell: These are more important than have we asked the Americans, whose convenience the human situation of people who have been taken we are protecting, to fund any part of this? away from their homes and want to go back there? Sir Peter Ricketts: Mr Mitchell, I have not accepted Sir Peter Ricketts: Remember also, Mr Mitchell, that we are protecting the Americans’ convenience. that we have already compensated the Chagos No, I think this is a cost, this is an issue— Islanders and we have already given— Q29 Mr Mitchell: They do not want people Q23 Mr Mitchell: I do not think you can compensate intruding on their base, do they, and that is basically people adequately for the loss of their homes in what we are defending? this fashion. Sir Peter Ricketts: I have said there are two points Sir Peter Ricketts: They have accepted financial here. There is a point of law about governability of compensation and British citizenship, so all the the overseas territories and there are our obligations Chagos Islanders have the right to come to the UK to the United States. The answer is no, we have not as British citizens. sought payment from the US.

Q24 Mr Mitchell: So we are going to go on Q30 Mr Mitchell: Perhaps we should submit a bill to fighting it? the Americans and they can happily consider paying Sir Peter Ricketts: We intend to go on. We have part of it since they are being so well defended by the asked for leave to appeal to the House of Lords. We Foreign and Commonwealth OYce quibbling on have been given that right of appeal to the House obscure points of law about Orders in Council. of Lords. However, let us pass on. I was surprised: we have obligations to these territories; they are mini-states, Q25 Mr Mitchell: In November 2000 Robin Cook most of whom are not going to be able to provide the accepted the judgment of the High Court that they framework, the apparatus of a big state for had the right to return. Why did we not adhere to themselves, and therefore presumably they need that position? more help. Why are we cutting down our obligations Sir Peter Ricketts: I cannot speak for the position as in general to these mini-states which do need the help it was in the year 2000. All I can do is set out the and support we can provide, and should provide? position that we are in— Sir Peter Ricketts: The Foreign OYce is not reducing the fairly small programme funds that we make available. Q26 Mr Mitchell: It says here that in June 2004 the FCO overturned Mr Cook’s decision. That would presumably be a ministerial decision to overturn a Q31 Mr Mitchell: We are reducing funding for law ministerial decision. and order, are we not? Sir Peter Ricketts: I am afraid I do not have the Sir Peter Ricketts: I will ask Mrs Shafik to say a background to that, Mr Mitchell.3 word in a moment on the DfID side. We are maintaining our own funding through the FCO’s programme funds, which are thinly spread, I accept, Q27 Mr Mitchell: Perhaps you could tell us. If this is going to be pursued at considerable expense, which across the territories but we try to target them on the must mean economies elsewhere and cuts in posts places that need them most. I wonder if we could elsewhere, we would need to know on whose have a word about the DfID programme. authority it is being pursued and who reversed Dr Shafik: In total, DfID and the FCO spend about Robin Cook’s decision. £43 million a year. Over half of that is DfID funding for the three poorest of the overseas territories, St 2 Note by witness: There were three, not two, grounds on Helena, Montserrat and Pitcairn. I think by any which the decision to appeal this case to the House of Lords benchmark we provide what we consider reasonable was based. The first two are set out in the response to Q25- needs. Just to give you a set of benchmarks, 27 below and were the ones we sought to address in the 2004 Montserrat we aid at the level of £2,607 per capita,St Orders in Council. The third reason for appealing was the Helena about £3,331 per capita. If you look at other constitutional point, set out in response to Question 132 (Ev 32). countries, for example, the French overseas 3 Note by witness: The two grounds for the 2004 Orders in territories, they support them on the same order of Council were as follows. First, that HMG had concluded on French Polynesia £2,514, the Netherlands Antilles the basis of the feasibility study commissioned in 2002 that £643, Aruba £242, New Zealand Tokelau £3,352, so lasting resettlement would be precarious and, if sponsored by the Government, would entail expensive underwriting by we are on the high end of aid levels to our overseas the British taxpayer for an open-ended period. Second, the territories. restoration of full immigration control over the entire territory was necessary to ensure and maintain the availability and eVective use of the Territory for defence Q32 Mr Mitchell: Are we helping them with disaster purposes, for which it was constituted and set aside in plans? I see from the Report that several of them in accordance with the UK’s treaty obligations. fact do not have disaster plans. We have seen the Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

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Foreign and Commonwealth Office & Department for International Development eVect of disaster in Montserrat. How many do not to have the regulatory underpinning for that. Many have disaster plans and why are we not helping them of them need our help—I absolutely accept that— develop them? which is why we have a financial adviser deployed in Dr Shafik: They all have elements of an overall the region who is there to help them and to get the disaster management strategy and we have been best advice we can from the UK. helping them on that. DfID provides a dedicated person who serves all the overseas territories to They are going to find that diYcult improve their disaster planning and in every case Q38 Mr Mitchell: when they have not even bred their own auditors, they are at diVerent stages in the process, some of and when we read in the Report that the auditors are them quite advanced, like Cayman, and others at subject to very severe social pressures, are earlier stages. We have supported Anguilla building inadequately backed, how are they going to develop a new disaster oYce, Cayman has a new agency as of an eVective regulatory regime in a world that is 2006, Turks and Caicos has strengthened its disaster awash with funny money looking for a home? oYce in the last year. Sir Peter Ricketts: I do not underestimate the challenge of that. I think in the richer and bigger Q33 Mr Mitchell: At the same time they are financial centres, like Bermuda and the Cayman presumably becoming more exposed, given climate Islands, there is now a well developed financial change and global warming. This surely imposes a services regulation function and indeed I think the need to accelerate the development of disaster NAO Report says that. planning for all of them. Dr Shafik: Absolutely. Q39 Mr Mitchell: I doubt that. Can you tell us that they are not being surreptitiously encouraged to Y Q34 Mr Mitchell: Is that being done? develop this is as a form of self-su ciency? Dr Shafik: I think it is. We are advancing in almost Sir Peter Ricketts: I can certainly tell you that the all the cases now. Exercises are more frequent, Government are not surreptitiously encouraging testing is more frequent and they are incorporating them to do that. We are encouraging them to be disaster risk management into their own planning proper, world-class, international financial centres. functions more actively to take into account the That is the way to mitigate the risk to the UK, which greater risk they may face in future as a result of we do take very seriously. climate change. Q40 Mr Dunne: I would like to explore this a little Q35 Mr Mitchell: Let me ask about financial further. You have mentioned that you have one services. About half the tax havens in the world are individual covering the Caribbean to advise on Crown dependencies. Some of them are making a financial services compliance, if that is the right way fairly rich living—Jersey, for instance—out of of expressing it. Do you think that is enough? financial services. What are we doing to ensure the Sir Peter Ricketts: It is never enough and the more proper regulation of financial services in these we can do to provide technical assistance and help to dependencies so they do not become tax havens on the territories, the better, which is why I have the scale of Jersey? Indeed, the Cayman Islands are recently written again to the Treasury and the already a . financial authorities here, encouraging them all to Sir Peter Ricketts: We take that very seriously. A do everything they can to work with the various number of them do now have significant financial financial centres in Bermuda and in the Caribbean services industries and we have been pressing them Overseas Territories. very hard through the Governors and in direct contacts with the Prime Ministers and Chief Q41 Mr Dunne: If you look at appendix 4, I have Ministers to make sure that they have the regulatory counted a total of 33 FCO members of staV plus four arrangements so that they can be safe and eVective from DfID, two of which are part-time, in post in financial centres. I think all the territories location for all of these overseas territories, only one understand that. of whom looks after financial services. It is that right? Sir Peter Ricketts: Only one oYcial— Q36 Mr Mitchell: It is also in their interests to develop them and to have a lax regulatory regime to attract funny money, is it not? Q42 Mr Dunne: I assume DfID and administrative Sir Peter Ricketts: No, I think it is in their interests staV are not involved in financial services. Is it right to have a proper regulatory regime, to get a proper that only one of the 33 has a focus on financial bill of health from the IMF and the Caribbean services? Financial Action Task Force. Sir Peter Ricketts: I think the number that you are counting up includes our Governors and Deputy Governors and UK-based staV in the Governor’s Jersey does not have that. Q37 Mr Mitchell: oYces in the territories. Sir Peter Ricketts: As I understand it, these territories are seeking to be world-class financial centres and a number of them are now very large Q43 Mr Dunne: I think it excludes the Governors. I financial centres and they understand that they need am counting up the bottom line in the table, so it Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

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Foreign and Commonwealth Office & Department for International Development excludes the Governors. It might include the Deputy Sir Peter Ricketts: By all means I will confirm that Governors. but all Governors of relevant territories are very Dr Shafik: We do use external expertise on a regular conscious that the regulation of the financial services basis. For example, even in St Helena, which has a industry and the oversight of contingent liability to very modest financial sector, we are providing this country is a very important part of their job.4 advisers to help them write new legislation. In Montserrat similarly the Governor retains special Q47 Mr Dunne: Can I turn to physical risk? I recall powers to restrict the amount the sector can grow as a schoolboy in the 1970s the Governor of because they have had past problems, and again, we Bermuda was shot and killed. What risk assessment have made external advice available. So the numbers do you undertake for posting people to vulnerable here are really just the oYcials who administer and and far remote territories, which in many cases are oversee but it is not the total pool of expertise that not accessible by aeroplane in less than 24 hours? we draw on. Sir Peter Ricketts: Some of the Governors are in very remote places, I agree. I saw the new Governor of Bermuda today. I did not actually raised with him Q44 Mr Dunne: Apart from the physical risk of his personal security but we maintain a watch on the natural disaster, which is obviously ever present in threat, terrorist or other threat, to all our heads of the Caribbean and in the remoter territories, the mission worldwide through the joint Whitehall reputational risk from financial malpractice is arrangements for threat assessment. That would rightly identified in the NAO Report as one of the cover potential threats to Governors in the overseas most serious reputational risks, which obviously territories. aVects this country as much as it does those territories, as we have an oversight responsibility, Q48 Mr Dunne: Do we have personal security and particularly given that Cayman, the British contracts in place in any of these locations to look V Virgin Islands, Gibraltar and, to a lesser extent, after our sta ? Anguilla but also Bermuda are increasingly Sir Peter Ricketts: No, sir, I do not believe so. significant players in the oVshore financial industry, it would seem to me that the use of the occasional Q49 Mr Dunne: Can I ask about the British outside consultant and one individual does not Antarctic Survey? We continue to lay claim to land begin to address the risks that this country is facing in the Antarctic. That is correct, is it not? from having oversight of all of these territories. Sir Peter Ricketts: Yes, and I believe that all the Sir Peter Ricketts: The first point I would make, territorial claims are on hold as a result of the going back to the table on page 23 of the Report, Antarctic Treaty but I believe that the claims is that it is primarily the responsibility of the stands, yes. territories themselves to develop the regulatory arrangements that are necessary. I see Bermuda Q50 Mr Dunne: We also have both the Falklands have 11 people dealing with financial intelligence and South Georgia and the Sandwich Islands within and investigative capacity; Cayman Islands have our territories. Do we maintain claims over the seas 21. The larger financial centres are employing around these territories for mineral extraction significant numbers of experts to monitor and rights? Sir Peter Ricketts: I think I need to write to you with regulate their own financial services industry, which 5 I think is right. We need to stand behind that. Just the full details of that. I do not want to mislead you. to finish my point, the primary responsibility has to lie on the territories themselves. In the larger and Q51 Mr Dunne: We certainly do in relation to the wealthier ones I believe that they are discharging Falkland Islands because it is identified in the NAO that more eVectively now and I think the Report Report on page 49. My interest would be in how bears this out. In the smaller territories I share the extensive these claims are in the whole of the South concern that the regulatory, anti-money laundering Atlantic area and what we are doing to facilitate exploration of where it is commercially viable. This and financial investigative powers are still small links into the risks identified by the air access and we need to do the maximum we can from the agreements for the Falklands, where it is clear from UK to bolster those. the NAO Report in appendix 3 that the Falklands government have raised concerns about the lack of a regular service. There is reference to a new service Q45 Mr Dunne: Do you train Governors or Deputy V Governors or other in-post sta on financial 4 Note by witness: Financial services training for Governors- irregularities and how to look out for them? designate is considered with the individual concerned in Sir Peter Ricketts: That, I am sure, is part of the accordance with their requirements, taking into account training that we give Governors before they go out. their experience and skills, and the issues relevant to their Post. For example, the new Governor of Bermuda (sworn in on 12 December) had pre-posting calls on a range of financial services-related departments, agencies, Q46 Mr Dunne: Can you confirm that for us in associations and companies in the UK. He also visited writing afterwards? You say you are sure, but you relevant experts in Washington and the Cayman Islands, and had extensive consultations with his predecessor and say it in such a way as to assume rather than to with the FCO. know. 5 Ev 16 Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

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Foreign and Commonwealth Office & Department for International Development with a civilian operator coming into force from last all that much by way of diversity of their economy. October. Can you confirm whether that has taken In many of them one single sector of the economy over and who the operator is? dominates. The Report here makes reference to the Sir Peter Ricketts: I confirm that it has taken over. narrow tax base and the need for economic I can confirm that it has a premium economy service diversification in many of them. They choose for tourists and others wishing to pay more to travel diVerent ways of doing that diversification and with a bit more comfort. I cannot tell you the name because we want to— of the operator but no doubt I could rapidly discover that for you.6 Q59 Mr Davidson: You have presumably condoned over a long period the development of some of these Q52 Mr Dunne: Is that service from the UK to the islands as financial tax havens on the basis that it Falklands and back and that is the extent of it? avoided British subsidy to them. Sir Peter Ricketts: That is right. Sir Peter Ricketts: I do not think we have condoned it. Q53 Mr Dunne: Could you also let us know the frequency of that and the cost to the of underwriting that, if there is a cost? Q60 Mr Davidson: Have you stopped it then? Sir Peter Ricketts: Of course. Sir Peter Ricketts: No. What we have said is—

Q54 Mr Dunne: There is a suggestion that it has not Q61 Mr Davidson: Have you taken action to stop it been underwritten in the past and it would be useful at any stage? to know whether we are continuing to subsidise that Sir Peter Ricketts: No, and I think it would have and whether that might be a fruitful source of been— encouraging increasing economic self-suYciency, not just of the Falklands but also the other territories So if you have not stopped it, you to the south, and whether or not that could then Q62 Mr Davidson: have obviously been happy to see it develop. become eVectively a profit centre for the FCO to Sir Peter Ricketts: We have given these territories help fund activities elsewhere in the world. autonomy to develop their economies. Sir Peter Ricketts: I am always in favour of profit centres for the FCO, Mr Dunne. I will certainly look at that and write to you. Q63 Mr Davidson: That is right. OK. I have had my answer to that. Thank you very much. Can I just ask Q55 Mr Dunne: Thank you. Finally, are we going to about this question of weak regulation and the lay claim to any of the Arctic territory? impact upon the United Kingdom’s reputation and Sir Peter Ricketts: I do not believe so. financial liability if the regulators were not adequate in Anguilla, Montserrat, Turks and Caicos, and we Q56 Mr Dunne: Do we have any historic claim to the were then sued in some way? There is a wonderful Arctic in view of the fact that our northernmost phrase in the briefing that we have been given islands are, I assume, eligible to claim? referring to these three jurisdictions which says that Sir Peter Ricketts: I will mislead you if I try to they: “have been increasingly left behind by rising answer that. I will include that in my letter.7 international standards”. That basically means they are not up to par. You are condoning that, I Q57 Mr Dunne: It may be a policy issue. There may presume, by not taking action. Why have you done be some historic antecedents that you could look up so? for us. Sir Peter Ricketts: I do not accept that we are Sir Peter Ricketts: I will cover that in my written condoning it. We are— response, Mr Dunne. Q64 Mr Davidson: Sorry. Can I clarify that? What Q58 Mr Davidson: Can I ask what assessment has action have you taken to resolve it then? been made of the reputational risks to the United Sir Peter Ricketts: As I have said in answer to Kingdom in view of the fact that so many of the previous questions, we are working with the small overseas territories are low-tax jurisdictions and territories, with advisers based in the region— established simply in order to oVer low tax basically? How does this impact on the and our reputation? Q65 Mr Davidson: This situation exists at the Sir Peter Ricketts: I do not think we have carried out moment. The standards of supervision in these a survey on that point. It goes to the heart of the territories are presently inadequate and you are overseas territories in the sense that these are self- allowing that to continue, leaving the United governing territories with their own governments, Kingdom at risk, not only of reputational damage their own elected legislatures, they make their own but also of financial liabilities. How long has this rules and regulations, so it is their choice which been going on? economic path to follow. Many of them do not have Sir Peter Ricketts: The risks have been growing as the development of all the territories as financial 6 Ev 16–17 centres has been growing. That is why we, as this 7 Note by witness: The UK will not be submitting any claim to Report indicates, have been working increasingly an extension of the continental shelf in the Arctic. hard— Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

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Q66 Mr Davidson: You are a bit complacent about and therefore the contingent liability of this country all this really, are you not? is lower, but it is not negligible and we do take it very Sir Peter Ricketts: No, sir. seriously.

Q67 Mr Davidson: What are you doing urgently to Q72 Mr Davidson: How do you deal with this deal with the inadequate financial supervision in unwillingness of the overseas financial sectors to Anguilla, Montserrat, and the Turks and Caicos? place what they describe as “undue burdens of Sir Peter Ricketts: As I have described, we are reporting” upon their clients which they feel might seeking to develop their own capacity to regulate drive them away, while at the same time we have to themselves. have adequate standards? There is always somebody providing a lower quality service somewhere in the world but surely we ought not to accept their Q68 Mr Davidson: “Seeking to develop” does not existence as an argument for second class standards. give me any smack of urgency, does it? This is a You have accepted this Report, have you not? This classic Foreign OYce phrase: “Some time in the point is made very well, I think, in paragraph 1.33. future we might get round to it if we have nothing Sir Peter Ricketts: Yes, we have accepted the better to do.” Report. We think this Report is extremely useful and Dr Shafik: In the case of Montserrat, they did have it reinforces our existing view that we have to problems in the late Eighties and early Nineties and concentrate on this very hard. We do not want any the FCO has given the Governor special powers to of these territories accepting lower standards than restrict the development of the financial sector the best in the region and the best in the world. because they judged that their capacity was inadequate. So they have actually frozen the They do at the moment. development of the financial sector. Q73 Mr Davidson: Sir Peter Ricketts: They can always be improved, and they must be. Q69 Mr Davidson: That is good. So it has not been Y felt su ciently inadequate in the other authorities to Q74 Mr Davidson: Of course they can always be take the same action, so you are happy to condone improved. That is a slightly diVerent point though. it there. You must be happy with it because Some of them do have standards well below—not otherwise you would have taken the same action as just below but well below—the best standards you have in Montserrat. elsewhere in the world, and you are condoning that. Sir Peter Ricketts: I am never happy where there are Sir Peter Ricketts: I accept the judgement in this contingent liabilities of the UK that are not being Report and I accept the responsibility for us to be fully managed. very active in dealing with it.

Q70 Mr Davidson: Why have you not then taken the Q75 Mr Davidson: I do not get the impression that same action as you have in Montserrat? you are very active, you see. That is the diYculty. I Sir Peter Ricketts: Because with all the overseas get the impression that you would much rather it all territories there is a balance to be struck between went away. oversight from the UK and giving these territories Sir Peter Ricketts: I am sorry that I fail to convince local autonomy to run their own aVairs. If we kept you on that point but it is something— stopping them and intervening and preventing them from taking action that they ought to to diversify Q76 Mr Davidson: I think I would be convinced by their economies, in a way, that contingent liability to evidence and you have not actually produced any the UK rises in other ways. So it is a balance. evidence that there is any degree of urgency in your actions in this matter. Q71 Mr Davidson: That is true. We might require to Sir Peter Ricketts: I do not believe that is the case. I give them subsidy, but surely the financial believe that there has been a lot of activity responsibilities that you might be shouldering on undertaken to improve the regulatory position of our behalf would far outweigh any conceivable these smaller territories. subsidy that we might have to provide to these locations given the enormous sums of money that Q77 Mr Davidson: Can I come to the question of are potentially at stake. I presume your pension is oVshore money-laundering? I see that in paragraph not aVected by any of them but many of the rest of 1.35 and in chart 9 there are very small numbers of ours might very well be. Does that not seem a trifle successful local prosecutions despite quite a number complacent to you? of suspicious activity reports. Is that because they Sir Peter Ricketts: No, I do not think we are are just being hyper-cautious in putting forward the complacent about this. I think there is a question of suspicious activity reports or is it because they are scale because the biggest financial risks are occurring not particularly active or there is a lack of capacity in the territories which are more able to fund the to prosecute? necessary regulation. In the smaller territories to Sir Peter Ricketts: I think there is certainly some of which you refer, quite rightly, you point to the risks. the latter. I think there is a lack of capacity to follow We are very conscious of this and we are doing up all these cases. I saw the same figures and I was things about them. They are smaller financial centres concerned by them. Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

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Q78 Mr Davidson: What have you done about it Dr Shafik: Many of them do have a significant since you saw the figures then? comparative advantage in the tourism sector, which Sir Peter Ricketts: As I said earlier on, the first thing is the fastest growing industry in the world. is I have written to other Departments in Whitehall who are experts in this area of financial regulation Q84 Mr Davidson: Let me stick with financial and international crime, the Serious Organised services. I can understand why you would want to Crime Agency, for example, urging them to move it on to something else. Let us just deal with V redouble their e orts to help us improve capacity. financial services. What competitive advantage do they have in financial services in Montserrat? Q79 Mr Davidson: That will really terrify them, will Dr Shafik: I think not a lot, which is why the it not, the knowledge that there is a letter circulating Governor has restricted the growth of the industry. in Whitehall? It just seems that you are not making much of an eVort. Any locals who are involved in Q85 Mr Davidson: I am sorry. In Anguilla then? money laundering will presumably be known by Dr Shafik: Anguilla is not my . . . other people in the islands, those who might have Sir Peter Ricketts: The point is that if we have given responsibility for taking action, but you do not seem these territories autonomy of governance, it is really to recognise that that is an enormous inhibitor. Have for them to decide how it is that they are going to you considered putting in external authorities, diversify their economies. investigatory or prosecution authorities, from the United Kingdom because we bear the ultimate risk? Q86 Mr Davidson: Up to a point, surely, because if Sir Peter Ricketts: Yes, and I think that is the sort of this goes pear-shaped, who ends up being ultimately issue that we will now be talking to others in London responsible? Not you but us collectively, is it not, about like the Serious Organised Crime Agency. really? Sir Peter Ricketts: Yes. Q80 Mr Davidson: Now you are talking about it. It has never occurred to you before then? Q87 Mr Davidson: So we do have a bit of an interest Sir Peter Ricketts: This Report has redoubled our in these matters. eVorts on the issue. Sir Peter Ricketts: Absolutely. We do.

What concerns me is that, if you Q81 Mr Davidson: So if this Report had not been Q88 Mr Davidson: produced, your eVorts would not have been look again at paragraph 2.18, about the deficient redoubled? public accounts, I am surprised to read here that Sir Peter Ricketts: They were continuing but this has though Bermuda central government departments been a helpful impetus to us to do more. are up to date, other public bodies had not produced accounts since 2002 and 2003, and then we see the Mr Davidson: Most of what we do is for your own Auditor General of the British Virgin Islands good, even though it might not appear that way at Y the time. estimates her sta ng levels are one third below complement. These are in locations which are meant Chairman: You are allowed to smile, by the way. to be leading examples of financial probity and excellence and yet they cannot actually look after Q82 Mr Davidson: We will try and stop that then. their own books, so what are they doing with other You are not here to enjoy yourselves, as I am sure people’s? you realise. Moving to St Helena, if I remember Sir Peter Ricketts: You rightly point to the need to correctly, Dr Shafik mentioned that you were going improve their public accounts and to get more to be helping St Helena develop a financial services people in to be able to do that. industry. Dr Shafik: No. To be honest, we are helping them Q89 Mr Davidson: You are redoubling your eVorts, draw up legislation. They currently do not have a I take it. significant financial sector and we do not see it as a Sir Peter Ricketts: Yes, sir. major source of comparative advantage for them. We are setting our hopes more on the tourism sector. Q90 Mr Davidson: Have you ever considered putting people directly into these locations? If the Bermuda Q83 Mr Davidson: In terms of comparative Auditor General cannot produce public bodies’ advantage, it is diYcult to identify anything that accounts, is that not an argument for saying perhaps some of these jurisdictions have as a competitive the National Audit OYce should be responsible for advantage except the ability to have lax standards these locations also? I appreciate that it would be an and low tax. Bermuda and Cayman Islands have onerous task for staV of the NAO to go out to these now built it up and I can see the comparative places but, nonetheless, it would ensure a degree of advantage there now but some of these others, apart probity and assurance to those of us in the United from not bothering too much where the money Kingdom. comes from and not pressing for information on Sir Peter Ricketts: In the case of Bermuda, Mr who actually owns the money, what is exactly the Davidson, they are a wealthy territory and they are comparative competitive advantage of Montserrat, capable of improving this performance themselves. I for example, when it comes to financial services? do not think this is adequate performance— Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

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Q91 Mr Davidson: Why have they not then? Sir Peter Ricketts: No, I am not happy about that. Sir Peter Ricketts: I understand that they are bringing in private sector expertise to improve their record on public accounts. Q97 Mr Davidson: So what have you done about it? Sir Peter Ricketts: For a start, we have our lever with the Turks and Caicos Islands and others of the Q92 Mr Davidson: They have not up to now. borrowing guidelines that do not allow them to Sir Peter Ricketts: My understanding is that they are borrow beyond a certain limit given the risk that now doing it. debt might also come back to this country as a contingent liability. We have exercised that and we Q93 Mr Davidson: This is not acceptable, is it, that continue to do that. We have required from them public bodies have not produced accounts since 2002 regular financial reporting so that we can see the and 2003? That is not acceptable but you have data and we have told them that they need to accepted it. You have not done anything about it. improve it. Sir Peter Ricketts: I would say it is not primarily for us to do something about it. It is primarily for the Q98 Mr Davidson: How can you have any faith in government of Bermuda to do something about it. the regular financial reporting when they do not This is a wealthy territory with resources of their have any more than one accountant in their audit own. I think it is primarily for them to do something department? about it. I agree that they should and I understand Sir Peter Ricketts: The answer is we need to get more that they are now bringing in additional support auditors and more professional staV— from the private sector to do it. I do not necessarily see that it is for the British government to put in people to audit the accounts of the Bermuda Q99 Mr Davidson: Redoubling of the eVort is being government, unless they ask us to. called for, unless I am mistaken. Dr Shafik: For the poorer territories which we give Sir Peter Ricketts: These are tiny places with small budgetary aid to, we have quite a rigorous process of populations and diYculty recruiting the right monitoring their expenditure, their audit. We do a people. rigorous analysis with 28 indicators called PEFA, we do a fiduciary risk analysis thoroughly every three We would not accept this for a years, we do an annual statement of progress on how Q100 Mr Davidson: moment in a small local authority in the UK. If we they are managing their own resources, so we do retain the same sort of responsibility for them that have a process for the smaller territories. we do for local authorities, why are we prepared to put up with it? If we do not have any responsibility, Q94 Mr Davidson: In paragraph 2.20 it mentions why not just say they are independent? The that in some of the small communities, it says here, assumption is that if they are overseas territories and “the auditors are more directly exposed to pressures we have given them citizenship, we do expect a from auditees and local interests” and basically it certain standard of behaviour and we expect it to be goes on to say, in suitably guarded language, that policed by yourselves, who clearly seem to have been they are pressed to produce results which are not asleep on the job. really justified. Why are you allowing this to take Sir Peter Ricketts: There is a diVerence with the local place? authorities here in the sense that the UK is not Dr Shafik: We are not allowing it in the places where funding many of these territories, apart from the two we are putting UK taxpayers’ money through the that Dr Shafik refers to. In the territories we are not budget, where we do our own reviews externally. funding by the UK taxpayer our position is a bit diVerent but I accept that overall, because we have Q95 Mr Davidson: What then does overseas territory this underlying responsibility and potential status means in these circumstances? Do we have no contingent liability, we have got to go on improving responsibility for making sure that their books are their capacity. I said in the case of the Turks and correct or that their money is not being stolen or Caicos Islands, for example, we have the National anything like that? School of Government working with them to try and Dr Shafik: Yes, we negotiate their budgets every improve the standard of public servants there, we are year, we have agreed a set of benchmarks—again, I trying to get more expertise into the public accounts am speaking for the ones that do not have their own and auditing process. So we are working to improve resources and are not responsible for their own the capacity but in these very small places it will economic management. For those we do a mid-year remain a problem. review, we have quarterly visits by DfID staV to make sure they are using their resources properly Q101 Chairman: You say they are very small places. and we do a full fiduciary risk analysis. Bermuda has a population of 63,000, it has a GDP of $4.9 billion. Their GDP is the first in the world, Q96 Mr Davidson: Are you happy with the situation $76,000 per head. That is all, by the way, on page 44. where in the Turks and Caicos the only person in the If we look at page 29, Sir Peter, you will see that, audit oYce with any accountancy qualification is the despite the fact that it is this fabulously rich place, chief auditor? It does not seem to me to be a very you are giving £338,000 to them. Why? 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Foreign and Commonwealth Office & Department for International Development run themselves, it rather begs the question why are Q108 Chairman: Are they colonies or are they not? you giving Bermuda £338,000? You are accepting If we are responsible for them, you can see that this responsibility, are you not? record in terms of compliance in money laundering, Sir Peter Ricketts: My comments earlier on were banking, insurance, securities, compared to the three really in respect of Turks and Caicos Islands rather Crown dependencies, Jersey, Guernsey, Isle of Man, than Bermuda. It is the very small territories like the is appalling and you are directly responsible for Turks and Caicos, Anguilla and Montserrat where these places. We are responsible. There is no point there are real capacity constraints which we need to shuZing and saying, “Oh, they manage themselves.” improve. Bermuda I think is a diVerent case, Mr Why are they still colonies? Chairman. Sir Peter Ricketts: We are ultimately responsible for them, Mr Chairman, but in terms of their own Q102 Chairman: Why is Bermuda still a colony, by economic and internal self-government, they are the way? responsible for themselves and, in a territory like Sir Peter Ricketts: Because this Parliament has given Bermuda, which is, as you say, wealthy, they are it an overseas territories constitution.8 capable of pulling these up.

Q103 Chairman: Why are we giving them £338,000 when it has the highest GDP per head in the world? Q109 Chairman: Why are they not doing it then? Sir Peter Ricketts: I think it is the costs of the staV Sir Peter Ricketts: I am told they are. working for the Governor, Mr Chairman. Q110 Chairman: A GDP of $4.9 billion, a Q104 Chairman: If it is still a colony, which it is, will population of 63,000, a GDP per head of $76,000, you now look, please, at page 22 at the traYc lights yet look at their record. It is appalling! Perhaps some there. This is following on from Mr Davidson’s people might say they are taking you for a ride. question. That is why I am intervening at this point. Sir Peter Ricketts: I think that actually the most You will see that some of these territories which you eVective pressure on them to improve their are responsible for perform very badly. There is a standards, apart from our continued large number of red lights. If you look at Bermuda, encouragement, is market forces. If they want to go for instance, money laundering, materially non- on being successful in the world, they need to compliant, 22%. This is on page 22, figure 8. improve. Insurance, materially non-observed, 44%. If you compare the British Virgin Islands, banking compliance, 36%. If you compare that to the three Q111 Chairman: It is not working up to now. You Crown dependencies, the Isle of Man, Jersey, et think market forces will work. If market forces cetera, they are 63%. They are performing poorly work, why has it not worked up to now? and you, Sir Peter, are responsible for them. There Sir Peter Ricketts: I was looking, for example, in the is a large risk involved here and apparently you are banking column, where I see that Bermuda is asleep on the job. actually doing pretty well in this data here. I agree Sir Peter Ricketts: I would contest that, Mr with you on insurance it is not doing adequately and Chairman. I think it is something that the Bermuda government need to take very seriously. Q105 Chairman: Why have you got some of these very bad figures and these traYc lights very clearly Sir Peter, I would like to ask you laid out in figure 8? You can compare them directly Q112 Mr Bacon: first of all—and in a way it follows on from what the with the three Crown dependencies, which generally Chairman was saying about the large number of red seem to perform much better. lights for observance and compliance. In paragraph Sir Peter Ricketts: I raised this with the Chief 2.15 on page 30 it refers to the overseas territories Ministers who were in London last week for the programme fund and it states that of the £11 million Overseas Territories Conference. I explained to spent on overseas territories, just under £5 million them that this is not satisfactory as far as we are relates to this fund, and aside from £1 million to concerned— meet international commitments in the polar regions, its aim is to promote sustainable How long have we been running Q106 Chairman: development and build capacity and so on, and there these places, Sir Peter? is therefore roughly about £4 million if you leave Sir Peter Ricketts: A number of them pointed out aside the polar region, £1 million. The second bullet that— points down it says that there were 118 applications and 65 approved in the most recent year. That works How long have we been running Q107 Chairman: out on average at £61,000 per successful application, these places? You raised it last week! which is tiny. It is hardly therefore a surprise that it Sir Peter Ricketts: Of course, it has been the subject says there is a burden that Governors’ oYces are of continuing discussion but I had the opportunity unable to meet in terms of monitoring and keeping to raise it again last week. track of these. How long has it been like this, with 8 Note by witness: In addition to its constitutional status, lots of small projects, and how soon is it going to get Bermuda is still an Overseas Territory because a majority of where the paragraph says you want to get, with its people has not expressed the wish to become independent. fewer larger projects? Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

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Sir Peter Ricketts: Right now we are trying to Q117 Mr Bacon: Is it possible you can send the improve that. I agree with you. I think there are too Committee a note, also stating what activities there many, too small projects and that they will be more have been towards that goal in the last five years or eVective if they can be combined into larger, multi- so? annual, sustained projects. We are taking that Sir Peter Ricketts: I agree with you about the forward now. importance of it and of course we can.10

Q113 Mr Bacon: So in future, assuming the money Q118 Mr Bacon: Thank you. I would like to ask you stays the same, how long will it be before we see 20 about page 26, where it states in paragraph 2.3 that or 15 projects rather than 65? there is an ambition to build up overseas territories Sir Peter Ricketts: In the new financial year, with the as a career specialism or career anchor, whatever Y new spending round starting from April, we are that is, and to increase the number of key o cials trying to get all our programme funding into fewer, with a background of direct administrative larger, more significant streams. So as from the new experience in territories, and while this is especially financial year I hope you will see that. welcomed by territory governments, there is still some way to go. Only four out of 11 Governors had previous experience working in overseas territories. Q114 Mr Bacon: Can I ask you about the Falkland If you go to appendix 4 on page 60 it sets them out. Islands? On page 49 it refers to the economic success You can see in the second line there: “Governor’s which the islands have enjoyed since enforcing a 200- previous overseas territories experience” and quite a mile fishing zone in the mid-1980s. Besides direct few of them just say no, no, no, no, no. If you are economic activity, this has generated annual interested in improving the quality of administration licensing income of up to £26 million for the in the territories, would not a good starting point be Falkland Islands government. This is on page 49. to ensure that nobody was appointed to a That is by far the biggest slug of income for the governorship who did not previously have some Falkland Islands government. Having visited the overseas territory administrative experience? Would Falkland Islands myself a few years ago, I can see that not be a very easy thing to do? The Governors what diVerence it is making to their ability to do not stay that long; they are only there for—how develop infrastructure. I have often wondered—can long? Two or three years? you explain why it is that the Foreign OYce opposed Sir Peter Ricketts: Three or four years. the attempt by the Falkland Islands to be able to license fishing in that way originally? It would be extremely easy to do. Sir Peter Ricketts: I am afraid I cannot, no. I can Q119 Mr Bacon: Sir Peter Ricketts: It would mean we would then write to you on that. I cannot recall that period have a very limited pool of people to appoint as precisely.9 Governors.

Q115 Mr Bacon: This is over the page, on page 50, Q120 Mr Bacon: Why? where it says that since 2003 Argentina has withheld Sir Peter Ricketts: If you look at the lower item on permission for charter flights through its airspace. that table, there are only a very small number of What diplomatic activity has been taking place with people in Governors’ oYces so the pool of people Argentina to try and get that decision rescinded so who we are giving experience to in the overseas that there can be charter flights going through territories— Argentine air space? Sir Peter Ricketts: We began the hearing, Mr Bacon, Hang on a minute. In Governors’ with a discussion of the new Argentine government Q121 Mr Bacon: oYces? and we certainly have been trying to persuade them Sir Peter Ricketts: Yes. that it is in the interests both of Argentina and the Falkland Islands to open up the islands to charter flights in that way. We have not succeeded yet. We Q122 Mr Bacon: Surely the person has to have some have raised that with them this year and we would governmental experience in the overseas territories. intend to raise it with the new President and the new They do not have to have sat in a Governor’s oYce Government as soon as they are in place. in order to gain experience of government in the Cayman Islands or in the Falkland Islands or Anguilla or wherever, do they? Q116 Mr Bacon: Perhaps I ought to know this. Is there yet a treaty governing the fisheries on the high 10 Note by witness: There is no treaty governing fishing on the seas, those outside the exclusion zone? When I high seas in the South West Atlantic. The UK has suggested visited it was clear that there was a mutual interest the establishment of a Multi Lateral High Seas Agreement to Argentina many times within the context of the South for Argentina and the Falkland Islands to obtain Atlantic Fisheries Commission (SAFC) but the Argentine such a treaty under the provisions of the UN Law of side has resisted this. The UK and Argentina last met to the Sea. Has progress been made on that? discuss the mandate of the SAFC in Buenos Aires in March Sir Peter Ricketts: I believe there is not yet, subject 2007. There has been some recent World Wildlife Fund (WWF) activity aimed at creating a High Seas Marine to correction, a treaty. Protected Area (MPA). The WWF is discussing its ideas with the FAO, the European Commission and relevant 9 Ev 17 coastal states. Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

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Sir Peter Ricketts: For diplomatic service oYcers it Sir Peter Ricketts: I understand so, yes. is either doing that or serving in the Overseas Territories Directorate of the FCO. We do and have Q127 Mr Bacon: “ . . . where an act purporting to be successfully gone outside government to recruit done under the prerogative directly aVects the rights specialists who have had experience. The new of an individual, the court may be asked to Governor of St Helena, for example, was former determine a number of issues.” In other words, it is Chief Secretary in the Falklands, I believe, and justiciable, is it not? where we can use prior experience of the overseas Sir Peter Ricketts: That is the question we are territories, we will but I would not want to exclude seeking to establish. others because some of the skills of a Governor are skills that other civil servants, diplomats, or people Q128 Mr Bacon: The Foreign OYce’s position at from other home departments will have. Leadership, law, the position you are contending for in the court influencing, persuading, judgement on financial and will when it gets to the House of Lords, is that resources issues—these are qualities that others can it is not even justiciable? I just want to be clear that have apart from those who have had experience in is the Foreign OYce’s position. the overseas territories. I would be reluctant to Sir Peter Ricketts: I am reluctant to go too far down narrow our pool to that point but I certainly do this road in a case which is going to shortly be before agree that we should be trying to build on expertise the House of Lords. that people have gained when they have been working in or on the overseas territories earlier in Q129 Mr Bacon: I do not want you to go into great their career when we are appointing Governors. I detail, I just want to ask what is the Foreign OYce certainly agree with that. contending for? You are contending for the notion this is not even justiciable, that is what you are saying? I would like to pursue this point Sir Peter Ricketts: Not justiciable in the UK courts, Q123 Mr Bacon: because these are laws which apply in the overseas that Mr Mitchell raised about the letter that we had territories and they are of course justiciable in the from the ex-High Commissioner of Mauritius about overseas territories’ courts. There is a risk of two the situation of Diego Garcia. Just to be clear, your jurisdictions coming to two diVerent conclusions on position is that you are trying to find out whether a point of law if it is justiciable both in the UK courts Orders in Council are subject to judicial review. That and in the courts of the overseas territories. is the thing you are trying to find out—is that right? Is that the purpose of the litigation now, from your point of view? Q130 Mr Bacon: Since the Supreme Court is the same in both cases, it seems quite unlikely they Sir Peter Ricketts: Whether Orders in Council made would not know what they had done. to make laws in the overseas territories are subject to Sir Peter Ricketts: I think I have gone as far as I can judicial review in the British courts. as a layman in explaining the position.

Q131 Mr Bacon: When are you expecting this to Q124 Mr Bacon: I understand. Are we really saying appear before the House of Lords? we have got to this point without this ever having Sir Peter Ricketts: I think not until well into next been tested in court so that there is no clear position year. on it? Sir Peter Ricketts: I believe that is the case, it yes. Q132 Mr Bacon: Could you send us a note setting out as far as you can the Government’s position? Sir Peter Ricketts: Of course.11 Q125 Mr Bacon: Even though the House of Lords is for many of these territories the Supreme Court? Q133 Mr Bacon: That would be very helpful. I Sir Peter Ricketts: Yes. would like to ask you about pension liabilities. You mentioned them much earlier and I think you said that something had been settled in relation to

Q126 Mr Bacon: I have just been sent—and 11 Note by witness: As well as striking down part of the 2004 unfortunately I cannot read out the whole thing Orders in Council which prevent the resettlement of the because it is too long—a note which I asked for from outer islands by Chagossians, the Court of Appeal judgment raises issues of constitutional law of general public the Library about this, which says—and it is importance that, in HMG’s view, would adversely aVect the referring to one of the leading textbooks, Bradley eVective governance of all British Overseas Territories. This and Ewing’s Constitutional Law, 14th edition— would include confusion in the legal system to be applied in “Some prerogative acts are unlikely to give rise to those Overseas Territories, and potential conflicts between local and English courts. For these reasons, in addition to the possibility of challenge in the courts. For the two grounds given above, the former Foreign Secretary example, the conferment of an honour or the concluded that it would be in the public interest that the dissolution of Parliament, but where an act Court of Appeal’s judgment should be appealed to the purporting to be done under the prerogative”—I House of Lords. We hope that the appeal in respect of this constitutional issue will restore clarity and certainty to the take it that Orders in Council are acts purporting to way legislation is enacted—and subject to legal challenge— be done under the prerogative? in the Territories. Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

Ev 14 Committee of Public Accounts: Evidence

Foreign and Commonwealth Office & Department for International Development pension liabilities. Plainly if there were any pension Q139 Mr Davidson: Can I ask then about the deficits presumably the ultimate liability would fall inspection thereof? How do you ensure that the on the United Kingdom, would it not? various police forces have got the capability and the Sir Peter Ricketts: Yes, my reference to that point levels of personnel and equipment to meet the was to the pensions agreement in respect of obligations which are placed upon them? Gibraltar, the so-called Cordoba Agreement, which Sir Peter Ricketts: There are possibilities, for drew a line under a long-standing dispute over example, for HM Inspector of Constabulary to visit pensions in Gibraltar. and to examine the state of police forces.

Q140 Mr Davidson: They have only been to three, Q134 Mr Bacon: Does that make for a precedent in I think. other territories, or are there similar disputes Sir Peter Ricketts: That has happened in a few cases. elsewhere? It is expensive and therefore a number of the Sir Peter Ricketts: I think this case was unique to territories find that a big financial burden. Gibraltar. Mr Bacon: Thank you very much. Q141 Mr Davidson: So it has not been done for Chairman: Mr Mitchell and Mr Davidson have one financial reasons? or two final supplementaries. Sir Peter Ricketts: We have not done it in all the territories. We have an adviser who can go out to visit, we have a database of retired British police It is a point which springs from Q135 Mr Mitchell: oYcers who are available to go out to advise, to be my aVection for Pitcairn because I have in my seconded— possession a tortoise carved by Mr Christian, which was carved especially for me when he sold it, so I Do I take it then that you are have always taken an interest. We have just recently Q142 Mr Davidson: happy with the levels of expertise of all the police had this complicated and extensive prosecution of forces in all the overseas territories at the moment? islanders, British police were sent out and I think a Sir Peter Ricketts: No, I do not think we are happy. policewoman was resident there for some time, there I think we are always looking for improvement. was a trial and now five people are in prison for various forms of sexual abuse, which seems to be a If you are not happy, then there way of life on Pitcairn; five out of a population of 45 Q143 Mr Davidson: is this question of not being particularly active and on the island are now in prison. Who pays for all appearing a trifle complacent, and it just appears that? that you are condoning behaviour which is not Sir Peter Ricketts: Who pays for the—? considered acceptable but you are not doing anything about it. That is my anxiety. You have had Q136 Mr Mitchell: For the police going out, the three Inspectorates of Constabulary visits but all the trial, the prosecutors, moving people around, rest have not had that. Do I take it then that the local putting them in prison, who pays for all that? It must governor has a veto or the locally elected members be a major part of the budget. have a veto in some way over whether or not the Sir Peter Ricketts: Yes, and I believe this led to a police should be inspected? Sir Peter Ricketts: It would be for the local territory position where the financial resources of the government to decide whether they wanted to bring territory were exhausted. The FCO has paid for in the Inspector of Constabulary or some other these costs because there was no other source of process. funding for them. Q144 Mr Davidson: Even though the governor has Q137 Mr Mitchell: Is there now going to be a responsibility for law and order? continuing police presence; are we assuming they are Sir Peter Ricketts: Yes, because it is the government still at it? to find the money to implement what is necessary. Sir Peter Ricketts: I am not informed enough. There is a continuing cost for the imprisonment of these Q145 Mr Davidson: So if we have a situation where people on the island, I am not aware there is a the governor says, “This police force is not up to the continuing police cost. It was a very traumatic case job” but the local government decides to do nothing for the whole community given the scale of it, as about it, we, you, are powerless, is that correct? you say. Sir Peter Ricketts: In the first place, it is up to the governor to encourage governments of the territories to prioritise the funds so we can do— Q138 Mr Davidson: Can I come back to the question Y of governors and I want to ask about the e cacy of Q146 Mr Davidson: I understand that. If we have a police forces. Do we have a responsibility for situation where the governor says, irrespective of ensuring that police forces in the various overseas whatever diplomatic back and forwards we have territories are fit for purpose? had, “This police force is not up to the job” and the Sir Peter Ricketts: We have oversight responsibility local authorities/government decide not to do for them, yes, because the governors are responsible anything about it, what then happens? Is the for law and order in their territories. governor powerless? Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

Committee of Public Accounts: Evidence Ev 15

Foreign and Commonwealth Office & Department for International Development

Sir Peter Ricketts: No, he is not powerless because Sir Peter Ricketts: I think we were right to set up this he has reserved powers, as is stated in the Report, to aviation safety risk management process because require funding if absolutely necessary. one of the biggest liabilities we face would be a major air accident or a major maritime accident. I think it Q147 Mr Davidson: So the fact these powers have has done a good job, now I think we need to move oV never been used means that the governors in all funding from the UK and encourage the territories circumstances are happy in fact to put up with the themselves to take on the funding of it. levels of policing available at the moment? Sir Peter Ricketts: No, I do not think they are Q153 Mr Davidson: A final, final point I wanted to happy, but the governor has to judge, does he want ask is in terms of aid to the overseas territories. I am to invoke this nuclear deterrent power of requiring aware that Cayman after Ivan got support from funding from the government, or can he achieve the several other jurisdictions, have there been other objective in other ways which are less examples of that? Is that something you are trying to confrontational in his territory. build up so the overseas territories, as it were, pool resources to some extent and work collaboratively? Q148 Mr Davidson: Coming back to the question of Dr Shafik: Cayman in fact did not receive aid from money laundering and those with investigative the UK after the hurricane because we felt they were V V powers, we can assume then that the governors in well enough o to be able to a ord it themselves, and circumstances where they feel these issues have not actually they did an excellent job. We do encourage been adequately investigated, or the capacity is not the overseas territories to tap into other resources there, are declining to use the only weapon that is and the European Union is an important source and available in their armoury if the local regime does pooling resources is something we are looking at. not agree and that is, as it were, the nuclear option? For example, one of the issues in the territories is up- So we have a situation where not upsetting the local dating their legal systems and we are funding a jurisdiction is more important than the probity of shared legal drafting capacity in Anguilla which will the financial system, is that true? serve three of the territories and possibly more in the Sir Peter Ricketts: That is not how I would describe future, with qualified lawyers who can help them the balance. drafting and up-dating their legal systems on a regular basis. Sir Peter Ricketts: A number of the territories are Q149 Mr Davidson: I know it is not how you would describe it; I am asking you whether or not it is true pooling resources in terms of disaster management, or false. so they can help each other in the event of a major Sir Peter Ricketts: I do not agree with it and I do not disaster. think that is an accurate way of describing it. The governor has to balance— Q154 Chairman: I have one last question. I am looking at the map of South Georgia and the South Sandwich Islands on page 57. The Falklands are a I understand that. Can I pursue Q150 Mr Davidson: thousand miles away, what would you do if an a final point, aviation regulation and BVI, why are Argentine whaler or business landed on one of these we subsidising them to the tune of £600,000 a year islands and started doing business? It happened when their GDP is as great as that of Britain as a before, did it not, in 1982? Would that be your whole and is probably a great deal more than my response? Where is the nearest Royal Navy ship? constituency? Sir Peter Ricketts: It might be in and around the Sir Peter Ricketts: I think the aviation safety Falkland Islands. arrangements have been a success and I think this— Q155 Chairman: A thousand miles away? Q151 Mr Davidson: That is not what I asked, I asked Sir Peter Ricketts: I do not suppose it would be why are we subsidising them. closer than that. Sir Peter Ricketts: If I may I will come to that. I think it has been a success, I think we now need to Q156 Chairman: You have worked this all out, have move on from the UK subsidising it to increasingly you? It happened once before, did it not? the funds being provided by the territories Sir Peter Ricketts: It is a very remote area, Mr themselves and in the case of BVI we should be now Chairman, yes. It would be a challenge. moving to the point where they can take over their funding of it. Q157 Chairman: It would be a challenge. The Royal Navy is up to it, is it? Q152 Mr Davidson: Why have we allowed to develop Sir Peter Ricketts: The Royal Navy is always up to a situation where people who are better oV than a challenge, I think, Mr Chairman. people in my constituency are being subsidised by Chairman: All right, we will leave it there. Thank you us? very much for your attendance. Processed: 24-04-2008 23:18:38 Page Layout: COENEW [E] PPSysB Job: 389335 Unit: PAG1

Ev 16 Committee of Public Accounts: Evidence

Letter from Mr David Snoxell to Comptroller and Auditor General My attention has been drawn to the section dealing with BIOT (Chagos Islands) in your Report, Managing risk in the overseas territories, at page 27 and at page 40 in Appendix 2. You might just remember that we touched on the issues when you came to my oYce. I am afraid the wording is somewhat misleading and I thought I should bring it to your attention in case you wished to issue an amendment. On page 40 (Key developments since the last NAO Report in 1997/8) it is stated, with reference to the Territory (not just Diego Garcia), that: “Successful court rulings and Orders in Council have disputed the right of displaced Chagossian natives to return to the Territory”. This is not correct. Only HMG has disputed the right of the inhabitants to return to their homeland. But in November 2000 Robin Cook accepted the judgement of the High Court that the Chagossians had the right to return. Naturally he excluded the US base on Diego Garcia which is the most southerly island of the Archipelago It is some 150 miles from the Outer Islands, which number between 55 and 65 islands. The exclusion of Diego Garcia is not at issue. Three years and seven months later, in June 2004, the FCO overturned Mr Cook’s decision, and the High Court judgement by Orders in Council. At judicial review in May 2006, the High court once again restored the right of Chagossians to return to the Outer Islands. The FCO appealed and lost a third time in May 2007 at the Court of Appeal. What the FCO are now appealing to the Lords over is not the Chagossians’ right to return, restored three times by the courts, but whether Orders in Council may be subject to judicial review. They say they need clarification. The Lords have agreed to hear the appeal in the spring on condition that the FCO pay all costs whatever the outcome. That outcome must be fairly obvious. So it is not true to say that the Courts have disputed the right to return, rather they have upheld it. At page 27 (Illustration of UK risks and liabilities in the Overseas Territories) the legal costs are put at £600,000. Legal costs paid by HMG since 2000 must be in excess of the £2.171 million which the FCO has admitted in answer to a PQ, because that figure does not include the cost of the Appeal so far. It is diYcult to get an accurate figure (it depends what you count) but my guess is that the FCO must have spent in excess of £3 million, not counting the cost of going to the Lords. I would have expected the NAO to question the wisdom of this expenditure since posts had inevitably had to be closed to fund it. It seems to me also that the language used on page 27 to describe the findings of the Feasibility Study has been exaggerated. I don’t think the Study added the words: “would involve expensive underwriting by the British Government for an open-ended period, and probably permanently.” It looks as if your Report repeated part of Mr Rammell’s statement to Parliament on 15 June 2004, rather than the exact words of the Feasibility Study conclusions which Mr Rammell also quoted. 22 November 2007

Supplementary memorandum submitted by the Foreign and Commonwealth OYce

Question 50 (Mr Philip Dunne): Falkland Islands: Continental Shelf The UK is currently researching its submission to the UN Commission on the Limits of the Continental Shelf (CLCS) in respect of the Falkland Islands continental shelf. Our plans for submission have not been finalised. The deadline for submission to the CLCS is May 2009. Any UK submission will be strictly in accordance with the UN Convention on the Law of the Sea. An extended continental shelf gives the coastal State sovereign rights over the seabed and subsoil. No such rights are accrued in respect of the water column or fishery resources. We have had useful contacts on the issue with Argentine MFA technical and legal experts. Meetings took place in 2001 and 2004. In June this year, we proposed a further meeting. If this goes ahead, it will be another example of the UK’s commitment to co-operation on areas of mutual interest in the South Atlantic. The UK has no doubts about its sovereignty of the Falkland Islands/South Georgia—or its right to consider submitting a claim to extend the continental shelf.

Question 51 (Mr Philip Dunne): Falkland Islands: Air Bridge Contract The operator of the contract from October 2007 to September 2008 is a US company, Omniair, who won the contract through an open tender process run by the MOD, and involving the FCO and the Falkland Islands Government in parts of the tender process. Each return flight has a direct cost to the MOD of some £300,000 (for the cost of the charter plus fuel at current prices). The airbridge currently operates three return flights a fortnight, via Ascension Island. It is a military flight run primarily to service the UK military garrison on the Falklands, and the UK military base on Ascension. The MOD funds this service, but in recognition of its vital importance to the social and economic development of the South Atlantic Overseas Territories, it carries a number of fare-paying non-MOD passengers and freight to and from both destinations. The fares charged by the MOD cover the bulk of the cost to the MOD of providing this civilian service (although for children and students discounted flights are currently oVered). The MOD guarantees an allocation of up to 29 seats southbound and 39 seats northbound for the Falklands Islands Government, Processed: 24-04-2008 23:18:38 Page Layout: COENEW [O] PPSysB Job: 389335 Unit: PAG1

Committee of Public Accounts: Evidence Ev 17

and 20 commercial seats each way between the UK and Ascension Island. The MOD has responded to a Falklands Islands request and provided up to 10 premium economy seats on each flight. The FCO is liaising between the MOD and the Governments of the Falkland Islands and Ascension Island on negotiations for the future service, including seat costs, advance payment and booking mechanism.

Question 114 (Mr Richard Bacon): Falkland Islands: Fisheries After the 1982 conflict, the British Government and the Falklands Islands Government were concerned at the threats to fishing stocks in the waters around the Falklands, and the need for conservation measures highlighted by scientific studies. The Falklands Islands Government at that time had no control beyond the three-mile territorial limit and were pressing the British Government unilaterally to impose restrictions and a Falklands Islands licensing regime. At the time, the British Government was concerned about the practical diYculties of implementing and policing a regime. In view of the issue of straddling stocks around the Falklands, the British Government preferred to seek a multilateral fisheries conservation agreement sponsored by a UN body. The British Government attempted to promote a multilateral fisheries management regime in the South West Atlantic through the UN Food and Agriculture Organisation (FAO). Unfortunately, this made little headway and the Argentine Government undermined its prospects by signing bilateral agreements in July 1986 with the USSR and Bulgaria, purporting to allow them to fish in Falklands waters. By October 1986, the British Government decided that it had no option but to take unilateral action and announced the introduction of the Falkland Islands Interim Conservation and Management Zone (FICZ). The FICZ, and the licensing regime, came into operation in February 1987.

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